Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 22, 2018.

We’ve noted in the previous Market Outlook that: “short-term momentums are deteriorating as S&P tested and failed at the trend channel moving average. A failure to hold above key price level means that long-term buying pressure has finally been exhausted…we expect increase in near-term volatility as markets work off excessive optimism.” As anticipated, stocks initially surged after the 2 p.m. ET release of the minutes, taking the S&P 30+ points higher before the bench mark gauge pulled a total reversal, erasing all of its gains and closing down 15 points at 2,701.33. The Dow Jones industrial average closed 0.67 percent lower at 24,797.78. The Nasdaq composite closed 0.2 percent lower at 7,218.23. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.82 percent to close at 20.02.

One of the noteworthy developments in recent days has been the move in real estate stocks. The group tumbled since the start of the year as strong economic data out of the US ignited fears that central banks may be stepping back from accommodative monetary policies, pushing bond yields upward. The Vanguard Real Estate ETF (VNQ) fell more than 12 percent YTD, underperformed the S&P by a wide margin. Now the question is whether this is a beginning of the end or there’s more downside ahead? Below is an update look at a trade in VNQ.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges. As shown, the underlying is in a short-term bullish trend when the price bars are painted in green. The underlying is in a short-term bearish trend when the price bars are painted in red. The yellow bars identify period of neutral or sideways trading pattern. Additionally, the light-blue shading represents the short-term trading range. A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading). Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Vanguard Real Estate ETF (weekly)

Our “U.S. Market Trading Map” painted VNQ bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, VNQ has been basing sideway using the 2015-2016 lows as support after the late 2017 downswing pushed the ETF below the 200-week moving average – the level that offered support since the ETF reached a major low in 2009. This is a bearish development, suggesting that VNQ might have to move to a much lower level to attract new buyers as soon as it works off overbought conditions.

VNQ has resistance just below 76. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish. Last changed February 12, 2018 from bearish (see area ‘A’ in the chart).

S&P continues basing sideways near the trend channel moving average after the last week’s oversold relief rally ran out of steam near 2750. That level was significant when the index fell below it in early February. Momentum indicator trended lower from below overbought zone, indicating an internal weakness. This is a negative development, increased the probability for a retest of the recent lows. Nevertheless, Money Flow measure is still above the zero line. This could help alleviate widespread breakdowns.

Short-term trading range: 2650 to 2745. S&P has support near 2700-2650. A close below 2650 will trigger all sorts of stops and a retest of the early February lows should be expected. The index has minor resistance near 2745. A close above that level could trigger acceleration toward 2800, based on the lower boundary of the pink band.

Long-term trading range: 2540 to 2820. Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 280 points range.

In summary, the market dances its way into an increasingly tight trading range as traders wondered whether more gain is warranted given the massive rally over the past week. While the short-term technical background remains positive, the manic nature of the market recently suggests that unless there is a significant improve in the background fundamentals, the bears will have the benefits of the doubts.